Whether a worker is an employee or an independent contractor has serious repercussions under New Jersey and federal wage and hour laws for both the worker and the company. For example: a) employees are entitled to be paid overtime if they work more than 40 hours during the work week while independent contractors have no such entitlement; and b) companies are required to pay state and federal payroll taxes for employees but not for independent contractors. Recently in Hargrove v. Sleepy’s LLC, 220 N.J. 289 (2015), the New Jersey Supreme Court was asked to determine whether a worker is an employee or an independent contractor for purposes of the New Jersey Wage and Hour Law (“WHL”) and the New Jersey Wage Payment Law (“WPL”).​In determining whether a worker should be classified as an employee or an independent contractor, the Court explored the application of four different tests: the right to control test, the hybrid test, the economic realties test, and the ABC test. The Court ultimately adopted the ABC test which is the most permissive test for determining that a worker is an employee. Explaining the test, the Court wrote:

The “ABC” test presumes an individual is an employee unless the employer can make certain showings regarding the individual employed, including:(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and​(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.

If the employer fails to satisfy any one of the three criteria set forth in the ABC test, the result is that a worker is classified as an employee.

Part A requires that the employer show that it neither exercised control over the worker nor had the ability to exercise control in terms of the completion of the work. “In establishing control for purposes of part A of the test, it is not necessary that the employer control every aspect of the worker’s trade; rather, some level of control may be sufficient.” This inquiry extends to the actual performance of the work, and the control that the employer has over the worker’s performance of the work.

Part B requires that the employer show that the services provided were “either outside the usual course of the business … or that such service is performed outside of all the places of business of the enterprise.” Part B of the ABC test focuses on identifying “the usual course of the business for which the individual has been retained to provide services or the usual place or places at which the employer performs its business.”

Part C requires that the employer show that the worker “has a profession that will plainly persist despite the termination of the challenged relationship.” This part of the test “calls for an enterprise that exists and can continue to exist independently of and apart from the particular service relationship. The enterprise must be one that is stable and lasting – one that will survive the termination of the relationship.”

The use of a singular test for determining whether a worker is an employee or independent contractor provides workers with knowledge of “when, how, and how much [they] will be paid” that is not reliant on a case-by-case analysis. "The ABC test provides an analytical framework to decide whether a person claiming unemployment benefits or seeking the protection of … wage-and-hour provisions … or … wage-payment provisions … is an independent contractor or an employee. It presumes that the claimant is an employee and imposes the burden to prove otherwise on the employer.”

Key Takeaways

It is presumed that a worker is an employee and the burden is on the employer to prove otherwise.

An employer is required to pay state and federal unemployment tax, social security tax and worker’s compensation/disability premiums for employees but is not required to make any of these payments for independent contractors.

Employees are entitled to be paid overtime and to receive unemployment and worker’s compensation benefits; independent contractors are not.

Audits by the IRS or the New Jersey Department of Labor that reveal misclassification of employees as independent contractors may result in the assessment of back taxes, interest and penalties.

​ConclusionWhether a worker is an employee or independent contractor is a fact sensitive inquiry. Correct classification is important. An employer who misclassifies workers is subject to back taxes and penalties. An employee who is misclassified may be getting short-changed because the employee is not being paid overtime and receiving unemployment and worker’s compensation benefits.

Michael M. DiCicco, a partner at Bathgate, Wegener & Wolf, has represented employers and workers in wage and hour disputes and other employment issues such as claims under the New Jersey Law Against Discrimination and Title VII. If you have a question regarding employment law, please contact Mr. DiCicco.